Management Accounting

How Management Accounting Information Supports Decision Making
Chapter 1
2012 Pearson Prentice Hall. All rights reserved.
Management Accounting Information
The institute of Management Accountants has defined management accounting as:

A value-adding continuous improvement process
of planning, designing, measuring, and operating both nonfinancial information systems and financial information systems that guides management action, motivates behavior, and supports and creates the cultural values necessary to achieve an organizations strategic, tactical and operating objectives.

Management accounting provides both financial
information and nonfinancial information The role of management information supports strategic (planning), operational (operating), and control (performance evaluation) management decision making
In short, management accounting information is pervasive and purposeful
Examples of management accounting information include:

The reported expense of an operating department,
such as the assembly department of an automobile plant or an electronics company The costs of producing a product The cost of delivering a service The cost of performing an activity or business processsuch as creating a customer invoice The costs of serving a customer
Management accounting also produces measures of the economic performance of decentralized operating units, such as:
Business units
Divisions
Departments
These measures help senior managers assess the performance of the companys decentralized units
Management accounting information is a key source of information for decision making, improvement, and control in organizations Effective management accounting systems can create considerable value to todays organizations by providing timely and accurate information about the activities required for their success
Changing Focus
Traditionally, management accounting information has been financial information

Denominated in a currency such as $ (dollars),
(pound sterling), (yen), or (euro)
Management accounting information has now expanded to encompass information that is operational or physical (nonfinancial) information:
Quality and process times More subjective measurements, such as: Customer satisfaction Employee capabilities New product performance
Financial vs. Management Accounting

Financial Accounting
Management Accounting
Communicates economic information to individuals and organizations that are external to the direct operations of the company Stresses the form in which it is communicated Is based on historical information
Provides information to managers and employees within the organization Allows great discretion to design systems that provide information for helping employees and managers make decisions Forward looking
Role of Financial Information
Financial information pervades our economy

It is the primary means of communication between
profit seeking organizations and their stakeholders For this reason organizations use financial measures internally as a broad indicator of performance
This financial information provides a signal that something is wrong, but not what is wrong Financial information summarizes underlying activities
Plan-Do-Check-Act Cycle or Deming Cycle
Developed by quality expert, W. Edwards Deming

A systematic and recursive way to develop, implement, evaluate, and change a course of action
PDCA Steps
Plan Step defines the organizations purpose and selects the focus and scope of its strategy Do Step involves the implementation of a chosen course of action Check Step includes measuring and monitoring performance and taking short-term actions based on measured performance Action Step involves managers taking actions to lower costs, change resource allocations, and improve quality
Behavioral Implications
As measurements are made on operations and especially on individuals and groups their behavior changes
People react when they are being measured, and
they react to the measurements They focus on the variables and behavior being measured and spend less attention on those not measured
Two old sayings recognize these phenomena:

What gets measured gets managed. If I cant measure it, I cant manage it.
Employees familiar with the current system may resist as managers attempt to introduce or redesign cost and performance measurement systems Employees have acquired expertise in the use of the old system Employees also may feel committed to the decisions based on the information the old system produced
Management accountants must understand and anticipate the reactions of individuals to information and measurements When the measurements are used not only for information, planning, and decision-making, but also for control, evaluation, and reward, employees and managers place great pressure on the measurements themselves
Managers and employees may take unexpected and undesirable actions to influence their score on the performance measure Managers seeking to improve current bonuses based on reported profits may skip discretionary expenditures that may improve performance in future periods
Meeting the Challenge
Management accounting has become an exciting discipline that is undergoing major changes to reflect the challenging new environment that organizations worldwide now face Need to develop financial and nonfinancial information that will:
Focus on aggregate, usually financial, measures of
performance in for-profit organizations that provide an overall summary of performance, and the ability of the organization to meet its financial objectives

Focus on the organizations success in meeting its
customers requirements in for-profit organizations so that the organization can react promptly to failures in delivering the value proposition
Enable all organizations to identify process
improvements needed to improve the organizations ability to deliver its value proposition

Enable all organizations to identify the potential of
the organizations members to manage and improve process performance Enable the for-profit organization to assess the profitability and desirability of continued investment in various entities such as products, product lines, departments, and organization units Enable the organization to motivate, monitor, and detect noncompliance with inappropriate organization behavior

Management Accounting

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How Management Accounting Information Supports Decision Making

2012 Pearson Prentice Hall. All rights reserved.